ABC SA. is financed solely by equity. Currently, the company has 20 million shares outstanding. These shares are listed in Euronext at 10€/share. The executive management team announced the aim of issuing 40 million euros in debt and using the proceeds to buy own shares (a share buyback program). a) What consequences on the market price do you anticipate, because of this announcement (provide the corresponding rationale for your answer)? b) How many shares can the company buy back with the proceeds from the debt issue? c) Following the change in financial structure, what will be the company’s market value (equity plus debt)?
ABC SA. is financed solely by equity. Currently, the company has 20 million shares
outstanding. These shares are listed in Euronext at 10€/share. The executive management team
announced the aim of issuing 40 million euros in debt and using the proceeds to buy own shares
(a share buyback program).
a) What consequences on the market price do you anticipate, because of this announcement
(provide the corresponding rationale for your answer)?
b) How many shares can the company buy back with the proceeds from the debt issue?
c) Following the change in financial structure, what will be the company’s market value (equity
plus debt)?
d) What level will the debt ratio reach after the change in financial structure?
e) With this change in financial structure, is the
or stay at the same level? Justify.
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